A BRIDGE OVER TROUBLED WATERS: STRAIGHT LINE DEPRECIATION VS. "NEW FOR OLD" RULE.
TABLE OF CONTENTS I. Facts and Holding 248 II. Background 249 A. Deductions from Compensatory Damage Awards 249 B. Federal Regulations Influencing Depreciation 251 III. The Court's Decision 252 IV. Analysis & Conclusion 254 A. Defective Use of the "New For Old" Principle in Maritime Law 254 B. Straight-Line Depreciation Method Flaws in Maritime Damage Allocation 255 C. Significance of No Set Rule for Depreciation in Maritime Law 257
I. FACTS AND HOLDING
In 2008, a motor vessel, owned by Taira Lynn Marine Limited No. 7, L.L.C. (Taira Lynn) and operated by D&S Marine Services, L.L.C. (D&S) allided with the Sunshine Bridge Pier No. 4 fender system while towing two barges in the Mississippi River. (1) Repairs for the bridge resulting from the allision between the vessel and fender system totaled $1,569,544.75. (2) Taira Lynn and D&S conceded to joint liability for the incident yet reserved their right to litigate claims for damages. (3) Louisiana's Department of Transportation and Development (DOTD) then filed suit in the Twenty-Third Judicial District Court for the State of Louisiana for the cost of repairs to the bridge against Taira Lynn and D&S. (4)
The district court rendered a judgment awarding DOTD $720,696.58 plus judicial interest. (5) The district court's reasoning for the reduced award was based on a 50% depreciation rate and a $64,075.80 bid bond credit. (6) Both defendants appealed the district court's judgment and asserted that the district court erred in its finding of a 50% maximum depreciation rate.' On appeal, the appellants argued the district court's application of the Truman-Hobbs Bridge Act of 1940 (Truman-Hobbs) and 33 C.F.R. [section] 277.8(g)(2), suggesting a 50% depreciation value was erroneous, but asserted that the court should have applied the "new for old" principles and straight-line depreciation method to calculate depreciation. (8) In response, the appellee argued there was no established calculation for depreciation for general maritime law, but the pier's condition at the time of the accident should be taken into consideration when determining depreciation rate. (9) On appeal, the Louisiana Court of Appeal, Fifth Circuit held that the 50% depreciation rate was proper for assessing the value of damages because the calculation took into account the Truman-Hobbs Bridge Act, as well as the guidance factors from 33 C.F.R. [section] 277.8(g)(2), and the specific conditions of the Sunshine Bridge. (10) Such conditions included the pier's age, condition, materials, function, and elements it had been exposed to when it was removed, which were compared to identical factors of similar bridges in the Mississippi River. (11)
A. Deductions from Compensatory Damage Awards
"The purpose of compensatory damages in tort cases is to place the injured person as nearly as possible in the condition he would have occupied if the wrong had not occurred." (12) Additionally, when tortious injury occurs to property of an unknown value, damage assessment is calculated by the cost of the property's repairs. (13) However, these standards conflict when essential repairs from tortious injury enhance a property's value. In these situations, the property's increased value is deducted from damages recovered by a plaintiff. (14)
The "new for old" principle is a rule rooted in the British Marine Insurance Act, (15) which seeks to avoid awarding an injured plaintiff with new and more valuable property when the damaged property's original value was depreciated prior to the tortious act. (16) Application of the "new for old" rule has only been found to be proper in situations when "new" material is used to repair the depreciated and tortiously damaged property. In these situations a certain sum (generally one third) of the cost of the new repair materials for the property is deducted from awarded damages. (1)' For example, the Fifth Circuit held in City of New Orleans for Use and Benefit of Sewerage and Water Bd. of New Orleans v. Am. Commercial Lines, Inc. that the "new for old" rule was not applicable when one of the defendant's tows damaged the plaintiff's protective fender system because the fender system had not deteriorated at the time of the allision. (18) Therefore, the award of damages to repair the fender system was not prone to deduction. (19)
When the "new for old" rule is an issue in maritime cases, federal courts have rejected the idea that a bridge's service life is independent of its piers. (20) Federal courts have noted that when an integral part of a bridge is replaced, it adds no overall value or life expectancy to the actual bridge. (21) Therefore, in circumstances when integral parts of a bridge have been damaged, courts have held the "new for old" rule could not be properly applied to assess depreciation. (22)
Historically, however, courts considered straight-line depreciation to be the "correct, long established, and fair method" of calculating deductions in situations where property value was enhanced as a result of repairs from tortious events. (23) The straight-line depreciation method takes the age of the damaged property and divides it by the property's expected lifespan at acquisition to calculate a depreciation analysis. (24) Furthermore, straight-line depreciation has been found to be applicable in situations where damaged property is replaced with materials in which courts have assumed or explicitly found the new replacement material to have identical service life of that of the damaged property before the tortious event occurred. (25) However, courts have determined that although straight-line depreciation may be used as a "handy tool," it is not always the most effective method of determining depreciation for every situation, given that materials may depreciate at a non-linear rate. (26)
Presently, "there is no fixed rule for the calculation of depreciation in general maritime law." (27) Traditionally, however, when marine vessels tortiously cause damage to land-based structures, "allowance is made for depreciation at the time of the collision." (28)
B. Federal Regulations Influencing Depreciation
The Truman-Hobbs Bridge Act was enacted in 1946 to regulate construction and alterations of certain bridges over navigable waters in the United
States. (29) Embodied within this act is 33 C.F.R. [section] 277.8, a section of Code of Federal Regulations Title 33 of Chapter II Corps of Engineers, Department of the Army. (30) This act sets forth guidelines to determine applicable procedures for apportionment of costs for bridge construction and alterations, (31) as well as guidelines to determine useful service life, or the "period of expected usefulness of an asset," (32) for bridges and some of the bridges' component parts. (33) 33C.F.R. [section] 277.8(g)(2) specifically explains, "[f]or timber structures which have been in existence for more than 50 percent of their estimated service life, the expired service life is held usually at 50 percent providing the structure has been adequately maintained and is in a good state of repair." (34) Although 33 C.F.R. [section] 277.8(g)(2) specifically references service life of railroad bridges, 33 C.F.R. [section] 277.8(g)(2) and 33 C.F.R. [section] 277.8(g)(3) give insight to applicable factors which may be taken into consideration when determining rate of depreciation and expected lifespan of a highway bridge,' (0) including structural deficiencies, location, volume of traffic, and all other factors that may impact service life. (36)
III. THE COURT'S DECISION
Louisiana Court of Appeal, Fifth Circuit judges reviewed the issue of determining an applicable depreciation rate to award proper damages and held that the "new for old" rule had no application pursuant to the facts of the situation at hand. (37) The court rejected that a 50% depreciation rate allowed DOTD a "betterment of its position," and rejected the appellant's position that depreciation would be properly calculated at a rate of 90%. Additionally, the court assessed the appellee's position that there is no set rule for depreciation analysis in general maritime law. (38) The court also noted the appellee's assertion that even the appellant's expert contended depreciation should have been calculated at a rate of only 75%, considering the pier's condition and not the 90% depreciation rate, which the appellee considered adequate. (39) Furthermore, in analyzing other cases from the Fifth and Ninth Circuits addressing "new for old" issues together with the facts in this case, the court found that the damaged pier was an essential component of the Sunshine Bridge, which would not have to be replaced had the allision not occurred. (40) Therefore, the court found that the appellant's argument that the "new for old" rule should have been applied was without merit. (41)
The court also rejected the appellant's position that a straight-line depreciation was properly applicable. (42) In addressing this issue, the court quoted Pillsbury Co. v. Midland Enters., Inc. by stating, "[w]hile a linear or straight line, depreciation method is most commonly used for property with a fixed life span, this method is not to be applied where evidence establishes that the original property had been deteriorating at a nonlinear rate." (43) The court also noted that in this situation, neither party's experts could agree on a rate of deterioration for the bridge. (44) Furthermore, neither party's experts testified that using the straight-line depreciation was suitable given the specific circumstances. (40) Additionally, the court also took other documentary evidence from the record into consideration, which further contributed to the finding that straight-line depreciation was not applicable. (46)
The court also found the appellant's argument that the trial court erroneously relied upon 33 C.F.R. [section] 277.8(g)(3) to be inaccurate. (47) Further, the court agreed with the appellant's assertion that the purpose of 33 C.F.R. [section] 277.8(g)(3) was not aimed at analyzing damages for lawsuits and should not be controlling in doing so. (48) However, the court also maintained that the regulation, although not controlling, might be used as functional guidelines for determination of "expected lifespan and depreciation of an integral part of a bridge." (49) In addition, the court emphasized that although 33 C.F.R. [section] 277.8(g)(3) particularly refers to railroad bridges, factors included in other parts of the regulation, namely parts (3) and (4), provided further guidance in determining a proper depreciation rate. (50) The court analyzed the factors set forth in 33 C.F.R. [section] 277.8(g)(3) and (4) by referencing expert testimony, which helped lead to the court's ultimate finding that there was no abuse of discretion by the trial court for reliance upon these guidelines. (51)
IV. ANALYSIS & CONCLUSION
Throughout its opinion, the court restated the appellee's argument that there is "no fixed rule for calculation of depreciation" in general maritime law. (52) The court's decision and emphasis on this argument reflects the importance of not having a "set rule" for depreciation calculation as well as the significance of allowing courts the freedom to use guidelines set forth in legislation to establish depreciation rates for each unique case. Furthermore, the Fifth Circuit's decision indicates that the "new for old" principle and straight-line depreciation methods are flawed with respect to seeking properly allocated damages in maritime law cases.
A. Defective Use of the "New For Old" Principle in Maritime Law
Similar to Fifth and Ninth Circuit holdings, Louisiana's Court of Appeal, Fifth Circuit, rejected the argument that the "new for old" rule was applicable because the damaged pier was an integral part of the overall bridge structure, "which if undamaged would not have to be replaced until the entire bridge was scheduled for replacement." (53) Although the court properly interpreted the "new for old" principle, the principle is flawed when awarding damages in maritime cases.
Application of "new for old" principle in the judicial system seeks to establish a predetermined method of awarding damages. This presents a problem for maritime cases, in which every situation has its own unique set of circumstances. By applying the "new for old" principle, defendants are prone to only pay a sum certain and may have the opportunity to escape paying the true value of the damaged property, when the damaged property has not undergone substantial deterioration prior to the incident. Additionally, federal courts have long determined that component parts of bridges do not have service lives independent of the bridge itself. Therefore, replacing an integral part of a bridge does not increase the bridge's overall value, (54) furthering the notion that the "new for old" principle has no application in maritime cases today. For example, the court in City of New Orleans for Use and Benefit of Sewerage and Water Bd. of New Orleans u. Am. Commercial Lines, Inc. held that when part of the appellee's nine year old fender system was damaged by appellant's vessel and needed replacement, because there was no evidence of the fender system's deterioration at the time of the allision, the value of the system was not prone to depreciation based upon "new for old" principles. (55) Had the court applied "new for old" principles for damage allocation, the appellee would not have been made whole by damages alone, and he would still have incurred a financial loss. However, even when damaged property has deteriorated prior to the tortious event, application of the new for old rule allows for no flexibility in determining depreciation rate by assessing other factors, such as how a particular bridge or vessel has been maintained or improved over time.
"New for old" principles, originating from the British Marine Insurance Act, (56) should be limited to insurance purposes that incorporate the phrase into its policies. For insurance purposes, the "new for old" principle may establish a co-pay provision. However, the "new for old" rule fails to properly address compensatory damages in maritime cases and, therefore, courts should apply another depreciation method in maritime cases.
B. Straight-Line Depreciation Method Flaws in Maritime Damage Allocation
The straight-line depreciation method was once viewed as the "gold standard" of determining depreciation rate. (07) However, it is not an effective method of assessing depreciation for maritime cases. Courts consider straight-line depreciation to be an effective means of determining depreciation when replacement materials are found to have an identical service life of the previously damaged property.5 (8) However, the court in Pillsbury Co. noted that "[w]hile a linear, or straight line depreciation method is most commonly used for property with a fixed life span, this method is not to be applied where evidence establishes that the original property had been deteriorating at a non-linear rate." (59)
Maritime cases involve marine vessels, bridges, oil platforms, and other structures around waterways, which are prone to a number of variable conditions including tides, waves, weather, and other factors, and which undoubtedly impact useful service life. The fact that a vessel or structure is even in use is enough to know that it will be exposed to inconsistent conditions throughout its useful life, which will cause it to deteriorate at a non-linear rate. Even if a vessel or structure is built to withstand certain conditions, over its useful lifespan the intensity of the conditions the vessel or structure endure will fluctuate, often exposing it to deterioration beyond reasonable wear and tear. In a deposition of an expert in reference to Winfield Grain, Inc. v. Marquette Transp. Co. L.L.C., the expert testified that Greenheart pile clusters owned by the plaintiffs and placed in the Mississippi have a normal useful life of thirty years. (60) However, he also explained that throughout a piling cluster's useful life, they encounter a number of "daily stresses" and "outside forces." For example, conditions such as the river bottom being scoured out underneath the piling clusters or hauling cables pulling a cluster with excessive force which caused the cluster to get out of line has an effect on the piling cluster's useful service life. (61) The expert also testified that if the same Greenheart piling cluster with a normal useful life of thirty years were placed in a pond, instead of the Mississippi River, its useful service life would be much longer due to the fact that it would not be exposed to the same number of outside variables. (62) The constant variables marine vessels and other structures involved in maritime cases endure which affect their deterioration rate make it impossible to determine a true "fixed lifespan" for these types of property. Therefore, it is impractical to apply the straight-line depreciation method to determine compensatory damages for property in maritime cases.
C. Significance of No Set Rule for Depreciation in Maritime Law
In use marine vessels and structures will always be exposed to variables that in turn alter their useful service life and rate of deterioration. By having no set rule for calculating depreciation for general maritime law, courts are given the liberty to determine the best method based on the unique circumstances of each individual case to award compensatory damages.
The court's decision in State v. Taira Lynn Marine Ltd. No. 7, L.L.C. was heavily based upon guidelines set forth in 33 C.F.R. [section] 277.8, as well as testimony given by experts. (63) The court correctly stated that although "this regulation was not intended to determine compensatory damages in a civil lawsuit and is not controlling... this regulation can be useful as guidance in the difficult task of calculating the expected lifespan and rate of depreciation of an integral part of a bridge." (64) The fact that the court was not limited to using a predetermined mathematical formula of calculating depreciation allowed them to base their consideration of the bridge's applicable service life upon guidelines set forth in 33 C.F.R. [section] 277.8, such as the ability to compare useful service life of the Sunshine Bridge with that of other similar bridges around the country. (60) This approach allowed the court to determine a more realistic service life for depreciation rate and essentially gave the court the ability to award the appropriate compensatory damages given the case's unique set of circumstances.
Additionally, by not restricting their determination of depreciation to a predetermined mathematical formula, the court was able to consider expert testimony when determining the best method to calculate the depreciation rate. This allowed the court to take factors set forth within 33 C.F.R. 277.8 and apply them to opinions given in expert testimony to make the best possible decision. However, if the court were restricted to using a predetermined formula such as straight-line depreciation, using elements of the formula like the pier's "fixed lifespan" would have altered their decision. The combination of the court's consideration of both the federal regulation guidelines along with expert testimony ultimately allowed the court to allocate the appropriate compensatory damages, which would not have occurred had the rules of maritime law dictated there be a set formula for depreciation calculation. Thus, it is of the utmost importance that courts be allowed the freedom to utilize the best possible method to determine depreciation rates based upon the unique set of facts and circumstances in each individual maritime case.
Keith M. Accardo Jr. (*)
(*) J.D. Candidate 2020, Loyola Maritime Law Journal Candidate 2018, Loyola University New Orleans College of Law; B.S. 2016, Louisiana State University.
(1) State v. Taira Lynn Marine Ltd. No. 7, 244 So. 3d 859, 861 (La. App. 5 Cir. 2018).
(2) Id. at 861.
(5) Id. at 862.
(6) Taira Lynn, 244 So. 3d at 862.
(8) Id. at 864
(9) Id. at 862.
(10) Id. at 859, 867.
(11) Taira Lynn, 244 So. 3d at 863-67.
(12) Freeport Sulphur Co. v. S/S Hermosa, 526 F.2d 300, 304 (5th Cir. 1976).
(16) Michael A. Snyder, Maritime Collision Damage to Vessels and Fixed Structures, 72 TUL. L. REV. 881, 923 (1997).
(16) Id. at 924.
(18) Taira Lynn, 244 So. 3d at 865 (citing City of New Orleans v. American Commercial Lines, Inc., 662 F. 2d 1121, 1123 (5th Cir. 1981)).
(19) City of New Orleans, 662 F.2d at 1124.
(20) Taira Lynn, 244 So. 3d at 864.
(21) Taira Lynn, 244 So. 3d at 864-65 (citing State of Or. By & Through State Highway Comm'n v. Tug Go-Getter, 468 F.2d 1270, 1273 (9th Cir. 1972)).
(22) Taira Lynn, 244 So. 3d at 864-65.
(23) Freeport Sulphur Co. v. S/S. Hermosa, 526 F.2d 300, 304 (5th Cir. 1976).
(24) Taira Lynn, 244 So. 3d at 862.
(25) Id. at 865.
(27) Id. at 864.
(28) Elgin, J. & E. R. Co. v. American Commercial Line, Inc., 317 F. Supp. 175, 177 (N.D. 111. 1970).
(29) Bridge Act, 33 U.S.C.S. [section] 491 (LexisNexis 2018).
(30) Taira Lynn, 244 So. 3d at 862.
(31) 33 C.F.R. [section] 277.8
(32) 33 C.F.R. [section] 277.8(g)
(35) Taira Lynn, 244 So. 3d at 866.
(36) 33 C.F.R. [section] 277.8(g)(3).
(37) Taira Lynn, 244 So. 3d at 864-65.
(38) Id. at 862.
(39) Id. at 864.
(40) Id. at 864-67.
(41) Id. at 865.
(42) Taira Lynn, 244 So.3d at 865.
(43) Taira Lynn, 244 So. 3d at 865-66 (citing Pillsbury Co. v. Midland Enters., Inc., 715 F. Supp. 738, 765 (E.D. La. 1989)).
(44) Id. at 866.
(48) Taira Lynn, 244 So. 3d at 866.
(52) Id. at 862, 864.
(53) Taira Lynn, 244 So. 3d at 865.
(54) State of Or. By & Through State Highway Comm'n v. Tug Go-Getter, 468 F.2d 1270, 1274 (9th Cir. 1972).
(56) City of New Orleans, 662 F.2d at 1124.
(57) Snyder, supra note 15, at 923.
(58) Freeport Sulphur Co., 526 F.2d at 304.
(58) Pillsbury Co. v. Midland Enters., Inc., 715 F. Supp. 738, 765 (E.D. La. 1989).
(59) Id. at 765.
(60) Winfield Grain, Inc., v. Marquette Transp. Co. LLC, Bo. 4:11CV2244 TIA, 2013 WL 3773969; Stockman Dep. 24. Apr. 4, 2013.
(61) Stockman Dep. 25. Apr. 4, 2013.
(62) Stockman Dep. 31. Apr. 4, 2013.
(63) State v. Taira Lynn Marine Ltd. No. 7, 244 So. 3d 859, 867 (La. App. 5 Cir. 2018).
(64) Id. at 866.
(65) Id. at 863, 865.
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|Author:||Accardo, Keith M.|
|Publication:||Loyola Maritime Law Journal|
|Date:||Jan 1, 2019|
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